Wiit S.p.A. (WIIT) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call Conference operator. Welcome, and thank you for joining the Wiit conference call to discuss about myLoc acquisition in Germany. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Alessandro Cozzi, Chief Executive Officer of Wiit. Please go ahead, sir.

Yes, thanks, everybody, for joining Wiit conference. I'm very proud for this deal in Germany. I am personally with all the management team of Wiit spent a lot of time in the last 2 years to find a first acquisition abroad, and Germany and France were the main market where we are searching. I think this target is a perfect fit with our strategy because we formed the company with a similar business model, high profitability like Wiit, a very young management team, very experienced [indiscernible] is important. And I think this is the best platform to develop the Wiit business in Germany. Germany is the main market in terms of size for the private cloud. The size of the market is close to EUR 2.5 billion addressable market. It is 4x with respect the Italian market size. So it's very important. We believe we can do create value in the future, expand the business in the -- with upselling of all the customer of myLoc and we can continue growth with the recurring revenue because myLoc is running with over 90% of our current revenue, very, very similar business. Now I hand over to Francesco Baroncelli for the presentation of our M&A. And Francesco, you can have all the information of our presentation. At the end of the presentation, we are available for all the Q&A.

Yes, thank you, Alessandro. Thank you very much. And I want to keep my introduction as short as I can in order to leave room for questions and for the details later on. But just to start, I can -- I completely agree with you, we have spent the last 2 years fully focused on consolidating the Italian market, and above all, preparing our company for international expansion. And yes, we are very happy about this deal that it is exactly what we were searching for. And probably you can also hear it from our voices. We are very happy and very proud about this transaction. And summarizing with the slogan, I could say that this is the right company at the right time, in the right country. And that's why we are so happy about this. But staying focused on the presentation we have sent, and starting from the slide at Page 3. You have several figures trying to depict the company. But summarizing again, you can see there is a particular fit with our search. The company is focused on co-location, private cloud and progressively, it is more and more focused also on managed hosting, which is the starting of the journey of providing high end services. And the profitability is very high. It is completely in line of Wiit. And there is also a great cash generation. The EBITDA converged quite internally if you take the growth number in cash and equals. And even if you add the contribution on CapEx, still, we have 50% of EBITDA generating cash during the year. I want also to point out that in our international search, we had a search not only for customers and the team, but also for an infrastructure. And in this case, we have a very robust infrastructure. The company has more than 2,000 square meters of data centers well positioned in the north of Germany. And this is very, very important for our future expansion in the country. We -- it's not probably the first time we speak about this, but for us, it was important in the search abroad, not only to search for a company, but also to have data centers placed locally to start deploying services there. And this is exactly the case. So you have in this slide, several figures but the short message that we want to pass is that we have infrastructure. We have a team, we have a profitability. We have complete alignment, not only in the mindset, but also in the services provided. Going into the next slide, #4, at Page #4, this is the exact fitting not only in China, as I was saying before, because as I was saying before, in the first 2 years of our expansion, we have been consolidated in Italy. And now it was the time to expand abroad. If you're following us in the last 6 months or so, you know that we were working not only in Germany, but also in France. And to be honest, also somewhere else in Europe. But Germany was and still is the main priority because there is a very good fit for our offering. Germany, it's not only the first economy in Europe, but it's specifically an economy largely based on manufacturing. And manufacturing is for sure a field where we think we are more prepared to offer specific services. And we have also to underline that we are one of the main SAP provider all over the world. And Germany, for sure, is the main country in terms of SAP usage in Europe. So it is really the right moment, in the right place to start our international journey. And even if Germany will not be probably the only country where we will expand in the short future. And specifically speaking about myLoc and going a little further than just figures, and I'm going to Slide #6, this company is exactly in line with the features we were searching as I was saying before, because it's strategically located in the north of Germany. That is a very good place where to be in Germany. But also from there, it is probably easier to develop or even other markets in the north of Europe. And we see from them also -- we see from there, sorry, also a potential for consolidate other smaller providers in the Northern part of Europe and not only in Germany. And as Alessandro was saying, there is also a very good management team. Alessandro underlined the fact that they are young and it is true and this is very good for the future plans. But at the same time, I want also to underline that this young team is very, very experienced because they were already in the market, the beginning of the 2000 years. So they are very, very experienced in their specific market. And by the way, they have spent a long part of their career inside myLoc, meaning that they know this company very well. And you can easily imagine that this is very important for us. And we see, in short, a lot of good fit among them. And Wiit you know that integration has always a risk. But in this case, we think that -- the risk is quite low. And I'm saying this both for the figures I was showing you before. I'm saying this for the mindset, we had the opportunity to find during the management presentation. And also because, as I was saying before, we have a strong profitability, a strong cash generation. So in short, we think this is, again, another positive aspect that we see in this integration. Alessandro, I don't know if you wanted to add something so far or on Slide #7, but in case you don't want, I can go ahead, saying that we are trying -- we have tried also to combine our -- the consensus that our analysts have on Wiit with the plan that the management of myLoc has developed. And on Slide #7, you see that -- obviously, there is a huge increase both in the revenues and the combined EBITDA. But more than that, we have tried to forecast the earning per share. And we think that not only from an industrial point of view, this deal is positive, but also from a more, let me say, financial point of view. There is a question very positive both on this year, I mean the 2020 and the next year. So again, this is another very important aspect coming from this acquisition. And last but not least, I want to spend some words on Slide #8 on our net debt. This operation has been completely financed, thanks to debt obtained by our partner, standard partners. And it's EUR 50 million, 5-0, million debt, specifically obtained to sustain this acquisition. But for us, it was also important to see what was the impact on the general figures of the company. And we have done some math on this and we have worked on the standard calculation on the net debt. And as you can see from the slide, we have also included the value of the treasury shares because as we always say there is a adverse effect of the international accounting principles that forced us to put into debt the future expenditures for the minorities. But at the same time, we are not allowed to take a positive consideration, the treasury shares that are specifically thought to pay these minorities. So in this case, you will find that we included the value of the treasury shares just for this reason. And considering a value that seems a little bit conservative compared with the current evaluation. You see that at the end of the operation, we will have a ratio below 3, between the net debt and the EBITDA, that we still consider to be a very good ratio. Even if I want to underline that as fast as possible, we would like to go back to what it is our standard ratio that is close to number 2 in terms of leverage of EBITDA compared to the net financial position. So in short, yes, we used some debt to finance this operation. Still, we are under a good ratio. But in a short period, we want to improve and to reach what we consider is the right number in terms of leverage of the company. And basically, this is what I wanted to say and Alessandro, do you have anything to add? Or do you want to start with the Q&A?

Yes, only some information about the CapEx is sure, is an interest from the investor. At the moment, the percent of myLoc acquisition is close to 83%. But this year, it is building a new data center. The end of the building of the data center is next year. And the CapEx estimates on the [indiscernible] 2 million. We want to upgrading a part of this data center to Level 4, Tier 4, and we will build the Tier 4 certified in Germany. So OpEx/CapEx estimates are EUR 4 million. EUR 2 million is adjusting the margin of myLoc. And we want to add EUR 2 million more to upgrading the data center to Tier 4. This is in terms of CapEx. We are ready for, I think, Q&A.

[Operator Instructions]. The first question is from Gabriele Berti with Banca IMI.

I have a few questions. First one is -- my understanding is that myLoc profile is pretty similar to Wiit. And anyway, is the most similar company to Wiit among the ones you acquired in the last few years? I would like to understand and to ask you your thoughts about the significant difference in valuations between myLoc and Wiit. I mean the implied multiple of the announced transaction is about 6.8x the 2019 EBITDA, while Wiit was trading 27x 2020 EBITDA before the deal or 18x 2021 EBITDA post acquisition. What's your thoughts about that? Secondly, I would like to ask you if you have to -- if we have to expect a capital increase to finance potential further M&A, or you have to wait before to other M&A activity. Then I would like to ask you, can you give us some indication regarding the amount of synergies do you expect from the deal and the growth rate do you expect for myLoc? Do you expect any extraordinary cost related to the acquisition or to the integration of the company? And lastly, just for confirmation, myLoc will be consolidated from the 1st of October. Is it correct?

Alessandro, if you want, I can start answering the first question, and then I leave the mic to you.

Okay. Okay.

Well, the first question basically is around the evaluation of this company. And yes, it's true. It is significantly below our multiples. And that's also why we are very happy about this transaction. The company is very well, trust me, very, very, very well, very, very in line with our model, and it's true as you were saying that probably this is the best acquisition we've made so far in terms of closeness of the model, of the profitability and so on and so forth. The only reason or probably the main reason for the multiples, we've been able to obtain is related. First of all, it's related with the strong and very hard, very tough job we've done in the last 2 years, because trust me, we have spent days and days, we're traveling in France and in Germany. And not only we've been present at I don't know how many meetings with management, with the advisers. So we were there. And part is also related with a little bit of luck, to be honest, because the holding group, the seller of myLoc basically is in a very peculiar moment of its life. They had to sell this company and another 3 because they have to consolidate on -- they have to focus, sorry, on their specific markets, on their specific core businesses. So we showed this was a little bit lateral. And we were there when the opportunity emerged. And we've been the fastest because we worked in the last 3 months as no one probably really did. And that's why we were able to obtain this fantastic deal. There was a compulsory expected data to complete the transaction. And to use the word of the seller, timing was and is when they told us, as important as the price. So in short, we were there at the right moment. Our model was already there in place. So we've been so fast in answering their questions. And at the end of the day, we've been the fastest, and that's why we have been able to obtain this fantastic multiple.

Francesco, sorry, I want to add -- sorry, one information to answer Berti. So the business model of myLoc is not 100% similar to Wiit. myLoc is the data center provider. With the cloud business side, but Wiit is different because the Wiit is the cloud for critical application when we have a very high volume asset, and we have [ channel ] of course, it's not a very, very similar business. It is a perfect platform close to expand for the synergy. It's not a real peer of Wiit.

It's true. It's completely true what you're saying. They are a fantastic platform to start offering the typical services offered by Wiit, which are of another class and that explains a great part of the differences between our evaluations and their evaluation.

Okay. Sorry, the second question is about capital increase. We think about them. Just participate is correct [indiscernible]. Sure, we are thinking about the capital increase in the future. About synergy, at the moment, no, because we want to invest in Germany. We want to hire competency in SAP, for example, in terms of sales and delivery. So we have the synergy in terms of cost. The difference in Italy, when we consolidate the target, we can create cost synergy. Abroad, we have to invest in the first year. For first 2 years, we were an investor. Our participation is where we return in 2 years. This is our participation. In the first year, we have -- importantly this company have the EBITDA very good. We can invest without problem. It's a good platform. Synergy, the last question about the synergy, we have the cost synergy. We utilize all the CapEx, of course, and we expect to reduce a little there. The CapEx, we buy all the hardware/software in -- from [indiscernible], but in terms of OpEx, we have no expectation to reduce the OpEx in the first 2 years.

What about costs, sorry? Do you expect any for the acquisition or for the integration?

So from a cost in term, no. At the moment, our participation is to hire new employees in Germany to begin to propose the Wiit service in terms of SAP. But we don't -- at the moment, we don't think to increase the operating cost of integration. We have just hired a new CEO. It's just in our budget. And to manage the operation in Germany, we don't think to increase the cost of employees. We adjusted in our budget to the new CEO starting in end of October.

The next question is from Hugo Voillaume with Raymond James.

So first of all, congratulations for this fabulous acquisition. And my main questions are regarding M&A., if you still intend to do some acquisition in France. And if so, when do you schedule to do that? And then if you have to -- my second question is on contract. If you need to change the contract's structure with the existing client of myLoc in Germany.

Okay. Francesco, can you answer about France?

Yes. I think the only thing I can say is that for sure, our pipeline of potential deals is still there, and it's improving week by week, I have -- I'm not joking 2 calls also this morning on these specific subjects. But I mean it's very hard to predict where and when. The only thing that I can say is that there will be, for sure, a long -- I hope half of M&A opportunities and transaction in the future, but still, we are not able to give you any forecast on this. Alessandro, do you want to add anything else on this?

No. Of course, at the moment we want to evaluate additional strategy to consider in Germany. We are sticking with the France target, but at the moment, we want to understand it is the possibility to consolidate in German because with myLoc came to be a perfect platform to build up another smaller provider. The second question is...

Sorry Alessandro, I just wanted to say that, obviously, another outcome of this acquisition that our visibility has increased and it was also like this. But I am expecting a better positioning in the international markets. And I expect -- I'm also expecting that probably more potential targets will emerge just for the fact that we've been able to be consistent to what we have declared. I mean it's 2 years that we say that we were preparing ourselves to go abroad. And now finally, we are in Germany. I'm not sure, but I am expecting an easier job in the future in the rest of the international -- in the cross-border acquisitions.

Okay. The different question about the contract with the customer and the client. We don't need to change the existing contractor because they are just recurring from over 90% of the total revenue. We want to upselling in the customer base of myLoc, the business of Wiit for the critical application to maintain all the existing customer, existing contractors who are just -- are just recurrent and the structural. And we want to upselling the new contract for 5 years for SAP or in general for all the critical applications. In general, foreign company and other information, I anticipate the question, ProSieben. MyLoc had a relation with ProSieben, the seller. But the total revenue in relation with ProSieben are EUR 3.2 million, under 20% of revenue, and we closed [indiscernible] of the signing, we signed a new contract with ProSieben for 5 years with a minimum revenue guarantee for 5 years.

Next question is from Giorgio Tavolini with Intermonte.

Just a few words on ProSieben role. You said that EUR 3.2 million was the revenues generated by them. So you basically expect them to remain your customers for another 5 years. So is it correct? And secondly, looking at your customer portfolio, how is it distributed in terms of concentration, the diversification across different industrial sectors? I mean, on the website of myLoc, it seems that they have 4 major customers, including banks, insurance companies and an Internet service provider. Is there any risk of excessive concentration? In your presentation, you talked about over 800 customers, while in their website, it seems just 4 big customers.

Okay, the first question I answered before. We have a 5 years guarantee in relation with ProSieben with EUR 3.2 million every year. For 5 years, it is a minimum revenue guarantee. We include in this revenue, all the revenue coming from Wiit, for example, because ProSieben interest to analyze the service effective for Wiit. But they guarantee myLoc for 5 years. In terms of concentration of the customer, I have some information, the top 50 customers have generated 53% of the revenue. The top 10 customers generate 32% of the revenue. So we have not a lot of concentration in terms of client. There are 800 customers, yes. But the large part of the revenue are in front of large corporate. 70% of the revenue is in the large corporation, banks, insurance and media. The media sector is roughly 20... 25%?

Yes.

25% of the revenue. The media sector is the main sector, but there is not a single customer with a high percent of the revenue.

Okay. And another question, if I may. On the website of myLoc, it seems that they have 2 brands, 1 dedicated for the data center services hosting and the other 1 related to Webtropia that seems to be the route service, dedicated route services. Would you keep this offer as well? Or are you going to terminate this activity?